In gaming-focused Macau, the profits of casino resorts broadly rise and fall based on a host of economic and political factors in China -- but those don't hit all of them equally. When it come to individual resorts and the handful of companies that operate them, winners and losers tend to be more determined by the local market's trends.
For example, one trend over the last few years has been a loss of market share for the older casinos located on the Macau Peninsula, and big gains for the new resorts in the up-and-coming Cotai region. That has been a tailwind for Melco Resorts (NASDAQ:MLCO), whose two main Macau properties -- City of Dreams and Studio City -- are in Cotai.
As 2018 unfolds, revenues in the Cotai Strip continue to grow. Wynn Resorts (NASDAQ:WYNN) is winning significant market share with its newer Wynn Palace resort, where revenue was up 47.2% in the first quarter. Las Vegas Sands (NYSE:LVS) is holding its own with its four Cotai resorts: They are achieving similar growth rates to the 20.5% of Macau's gaming market overall. So if Wynn is taking market share, and Las Vegas Sands is holding steady, at least one of the other four concessionaires has to be losing ground. And by the looks of its recent first-quarter earnings release, Melco Resorts is one of the losers.
Melco Resorts' rough quarter
Overall, Melco Resorts' revenue was up 3% to $1.28 billion, and its adjusted property EBITDA (a proxy for resort cash flow) increased 14% to $401.8 million. Net income was $156.6 million, up from $113.4 million a year ago, and earnings were $0.23 per ADS. On the surface, those results look decent, but if we put them into the context of Macau overall, they don't look as strong.
Macau's gaming market grew by 20.5% in Q1 2018, so that's the bar each resort's results should be compared to. Here's a look at how Melco Resorts' rolling chip (VIP) and non-rolling chip (mass-market) gameplay stacked up against competitors and the market overall in the quarter. I think these metrics are the best gauge of a resort's performance because they measure the volume of chips bet, not how lucky a resort was in the casino.
% Change Y-O-Y
Mass Market Volume/
% Change Y-O-Y
|City of Dreams||
|Sands Cotai Central||
City of Dreams vastly underperformed Macau as a whole in the first quarter, and fared much worse than its neighbors, the Venetian Macau and Wynn Palace. That's a big deal because it's by far Melco Resorts' biggest property.
Somewhat offsetting City of Dreams' VIP weakness was Studio City, which outperformed in both VIP and mass markets. But in combination, VIP volume at Studio City and City of Dreams was only up 9.3%, which lagged its competitors and the broader market. That's where I would have some worries about Melco Resorts.
Manila is a bright spot
In the Philippines, Melco Resorts may have a more surprising winner on its hands. When City of Dreams Manila opened, no one knew quite what to expect from the resort. Nearly three years later, we can say that it's a highly profitable resort.
Revenue at City of Dreams Manila was down 9.7% in Q1 to $142.2 million and adjusted EBITDA fell $2.3 million to $58.8 million. But the last year has been pretty flat overall, and trailing-12-month EBITDA was $232.7 million, $148.6 million of which is allocated to Melco Resorts' portion of ownership. That's a solid return on a $680 million original investment in the project, and a solid contributor to the company's operations.
Melco Resorts is in a holding pattern.
Macau is booming right now, but Melco Resorts isn't enjoying the region's growth nearly as much as its competitors are. And given that MGM Resorts just opened a new property earlier this year, and that SJM hopes to open its first Cotai project, Grand Lisboa Palace, in the second half,the pressure on market share is far from over.
By the looks of things, investors shouldn't expect much more than single-digit percentage growth from Melco Resorts, despite double-digit growth in Macau overall. Given the competition, its likely that market share will continue to slip away, and that's a trend Melco Resorts will have a hard time fighting.